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Firm Dynamics and Trade

Authors
  • Alessandria, George
  • Arkolakis, Costas
  • Ruhl, Kim J.
Type
Published Article
Journal
Annual Review of Economics
Publisher
Annual Reviews
Publication Date
Aug 05, 2021
Volume
13
Pages
253–280
Identifiers
DOI: 10.1146/annurev-economics-090919-025159
Source
Annual Reviews
Keywords
License
Yellow

Abstract

We review the literature that studies the dynamics of firms in foreign markets, at both the intensive and extensive margins, and their aggregate implications. We first summarize a set of micro facts on exporter entry, expansion, contraction, and exit and several macro facts about the response of aggregate trade flows to trade-policy and business-cycle shocks. We then present the canonical model developed to account for these facts and discuss its connection to the empirical evidence. We show how three model features—future uncertain profits, an investment in market access, and high depreciation of that access upon exit—generate transition dynamics and long-run aggregate outcomes from a cut in tariffs. The model and its extensions contribute to our understanding of trade integration and the evolution of future trade barriers. We discuss the key challenges faced by the canonical model, its possible extensions, and applications of the framework to recent global events.

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